ANALYSIS: Belarus’ monetary policy losing transparency, uncertainty in economy grows

<p> MINSK, Apr 1 - PrimePress. The unprecedented pressure on Belarus’ banking sector fr om real sector lobbyists has led to a reduction in the transparency of the country’s monetary policy. The National Bank’s decisions are losing their predictability and are moving from the market domain to the political arena. At the same time, the negative impact is also felt by other players in the Belarusian market - the demand for foreign currency remains high and inflation expectations are rising. </p> <p>   </p> <p> Table. Key performance indicators of Belarus’ monetary sector in 2020 </p> <table border="1" cellspacing="0" cellpadding="0"> <tbody> <tr> <td> <p>   </p> </td> <td> <p align="center"> Real </p> <p align="center"> standing as of Mar 1, 2021 </p> </td> <td> <p> Official forecast, as anticipated on Jan 1, 2022 </p> </td> </tr> <tr> <td> <p> Belarusian ruble’s average exchange rate against US dollar, Br/$1 </p> </td> <td> <p align="center"> 2.5858* </p> </td> <td> <p align="center"> 2.5678** (annual average rate) </p> </td> </tr> <tr> <td> <p> Refinancing rate, per cent per annum </p> </td> <td> <p align="center"> 7.75*** </p> </td> <td> <p align="center"> 7.75-8.0** </p> </td> </tr> <tr> <td> <p> Year-on-year inflation growth, % (key target of monetary policy) </p> </td> <td> <p align="center"> 7.7 (Feb 2021 on Feb 2020) </p> </td> <td> <p align="center"> not more than 5 (Dec 2021 on Dec 2020) </p> </td> </tr> <tr> <td> <p> Belarus’ international reserves growth by the IMF’s SDDS, billion US dollars </p> </td> <td> <p align="center"> 7.115 </p> </td> <td> <p align="center"> at least 6 </p> </td> </tr> <tr> <td> <p> Growth in broad money supply since early 2018, % (intermediary target of monetary policy) </p> </td> <td> <p align="center"> 6.3 (Feb 2021 on Feb 2020) </p> </td> <td> <p align="center"> 7-10 (Dec 2021 on Dec 2020) </p> </td> </tr> </tbody> </table> <p> * Average official exchange rate of the Belarusian ruble to foreign currencies, calculated as arithmetic average, January-February 2021 </p> <p> ** Main guidelines for Belarus’ Fiscal and Tax Policy for 2021-2023 </p> <p> *** reduced by 0.25 percentage points on July 1, 2020 </p> <p>   </p> <p> National Bank lets key rate crawl into negative territory </p> <p>   </p> <p> On February 17, 2021, according to the then effective schedule, the National Bank had to hold a monetary policy board meeting and decide on the size of the refinancing rate and the rates on continuously available liquidity regulation operations. However, on that day the decision was postponed until March 12. The National Bank justified it by "the need for additional analysis of the forecasted dynamics of consumer prices and assessment of the duration of the impact of key factors that led to the acceleration of consumer price growth”. </p> <p>   </p> <p> On March 12, the board of the National Bank assembled again to discuss the issue that had already been postponed. The regulator’s management decided to keep the refinancing rate and interest rates for liquidity regulation transactions at the same level - 7.75% and 6.75-8.75% per annum, respectively, despite the fact that the annual inflation in Belarus accelerated to 8.7% in February. In other words, they allowed the refinancing rate to float into the negative territory. </p> <p>   </p> <p> The decision confirmed the unprecedented pressure on the National Bank from the real sector lobby. For state-owned enterprises, an increase in the refinancing rate would mean higher loan payments and further deterioration of their financial position due to high levels of the credit debt burden. </p> <p>   </p> <p> Also on March 12, the regulator said that the suspension of permanently available liquidity support and withdrawal operations is extended until the National Bank’s board makes a decision on their resumption. The decision to suspend these operations was first made in late August 2020 and initially was to last until mid-September, but was repeatedly extended, most recently until mid-May 2021. </p> <p>   </p> <p> In fact, the refinancing rate has become a nominal value, reflecting little of the real situation on the monetary market. Due to the manual allocation of resources by the National Bank, the rate on overnight loans in the interbank market has also become uninformative in recent months. </p> <p>   </p> <p> Some idea of the cost of money in the market can be gleaned from the interest rates on deposits. Thus, the average rate on new fixed-term deposits of individuals in Belarusian rubles in February this year was 17.76% per annum against 17.68% a month earlier, and 9.42% in February 2020. </p> <p>   </p> <p> The results of the March credit auction testify to the regulator’s tough stance and the ongoing liquidity shortage. According to the National Bank, credit auction #745 was held on March 17, 2021. It has a stated interest rate of 9.75% per annum for a period of 180 days. Twenty-six applications from 15 banks totalling Br3.702 billion were accepted for the auction. It was decided to set the volume of loans in the amount of Br250.0 million. </p> <p>   </p> <p> Lending on the decline </p> <p>   </p> <p> The liquidity deficit and worsened financial situation in the real sector contribute to a decrease in lending by commercial banks. According to the regulator, the debt on loans issued by banks to different sectors of the economy, and the debt of sectors of the economy on matured loans acquired by banks decreased by 1.3% in January-February 2021 to Br57.983 billion as of March 1, 2021. </p> <p>   </p> <p> Particularly, the debt in Belarusian rubles decreased by 0.6% to Br30.780 billion for the first two months of the year, while the FX debt reduced by 3% to $10.455 billion. </p> <p>   </p> <p> Thus, almost half of the banks' loan portfolio (46.9%) is still formed in foreign currency, which generates currency exchange risks for both the borrowers and the banks themselves. This is especially true for the public sector, wh ere 64.4% of loans are denominated in foreign currency. </p> <p>   </p> <p> The National Bank is also a hostage to this situation. It has to intervene in the exchange rate process to prevent the national currency from falling and to avoid increasing the credit burden on public sector enterprises. </p> <p>   </p> <p> According to the National Bank, state-owned commercial enterprises owed banks Br20.871 billion as of March 1, 2021, which is 4.1% less than as of January 1, 2021. Including debts in Belarusian rubles - Br7.440 billion, down 1% YTD, foreign currency debt - $5.162 billion, down 6.5% YTD. </p> <p>   </p> <p> A more active reduction in the foreign currency component of loan portfolios was due to the implementation of measures to convert the credit debt of certain enterprises from foreign currency into Belarusian rubles. The National Bank announced the implementation of such measures in its press release on the change in the level of foreign exchange reserves in February. </p> <p>   </p> <p> The private sector’s credit debt amounted to Br18.920 billion as of Mar 1, 2021, up 1.6% year to date. Including ruble loans - Br7.495 billion (+0.7% YTD), foreign currency loans - $4.391 billion (+1.3%). </p> <p>   </p> <p> In late August - early September 2020, almost all banks curtailed lending to private households due to lack of liquidity or significantly increased interest rates on new loans. At the same time, households showed increased interest in lending in August amid post-election uncertainty. In September, the interest remained, but was substantially limited by the banks. </p> <p>   </p> <p> Recently the Belarusian banks have gradually resumed lending to individuals, but the rates on the credits they offer are still much higher than reasonable levels, which contributes to reducing the level of credit debt of physical persons to banks. </p> <p>   </p> <p> According to the regulator, the debt on consumer loans amounted to Br5.327 billion as of March 1, 2021, down 4.1% year to date. Consumer lending is currently experiencing bad times. In 2020, consumer lending grew by less than 1.3% compared to almost 25% in 2019. </p> <p>   </p> <p> The total amount of credit debt of households to banks amounted to Br15.568 billion as of February 1, 2021, down 0.9% year to date. For the whole of the last year, this indicator increased by 10.9%, mainly due to real estate lending. </p> <p>   </p> <p> Overall, we can note the persistently high level of credit risks in the Belarusian economy, which are caused by excessively high share of foreign currency credits in banks’ loan portfolios, the deteriorating financial situation of legal entities and individuals in the context of the economic crisis, and the authorities' return to administrative levers of lending management. </p> <p>   </p> <p> Uncertainty boosts demand for foreign exchange </p> <p>   </p> <p> Overall, FX purchases from banks exceeded FX sales to bank by $305.7 million in Feb 2021, to compare with $50.7 million IN Jan 2021 and $311.2 million in Feb 2020. As noted above, the National Bank attributed February’s increased interest in foreign currency to the implementation of measures aimed at converting credit debts of certain enterprises from foreign currency to Belarusian rubles. </p> <p>   </p> <p> All in all, in February FX purchases by resident legal entities exceeded FX sales by $176.1 million, while in Jan 2021 their FX sales exceeded FX purchases by $48.9 million. At the same time the volume of foreign currency purchase increased by 5.7% month on month in February to $1.985 billion, while FX sales decreased by 6.1% to $1.809 billion. </p> <p>   </p> <p> Belarusian banks purchased $147.5 million on a net basis in February against $14.3 million in Jan 2021: their FX purchases increased by 3.4% month on month to $3.559 billion, while FX sale fell by 4% to $3.412 billion. </p> <p>   </p> <p> Private households are more predictable in their behaviour on the FX market. They have been net buyers of foreign currency for 15 months in a row, i.e. FX purchases by private households have been traditionally higher than their FX sales to banks for 15 months in a row. </p> <p>   </p> <p> According to the National Bank, FX purchases by individuals exceeded their FX sales by $47.2 million in February, compared to $154.2 million in Jan 2021. </p> <p>   </p> <p> In total, FX purchases by natural persons in February 2021 amounted to $756.6 million, down 1.3% month on month, FX sales - $709.4 million, up 15.8%. </p> <p>   </p> <p> The increased demand for foreign currency, the need to maintain the exchange rate of the Belarusian ruble, as well as significant payments on foreign currency debts of the government and the National Bank, contribute to the negative dynamics of Belarus' foreign exchange reserves. According to the regulator, international reserve assets of Belarus decreased by $88.9 million (1.2%) in February 2021 after a decrease by $265 million (3.5%) in January 2021. </p> <p>   </p> <p> According to the regulator, the level of international reserve assets of Belarus declined in February due to the repayment of foreign and domestic government obligations in foreign currency in the amount of $250 million ($410.6 million in January 2021), the sale of foreign currency by the National Bank on the BCSE trading, as well as the decline in the value of monetary gold. </p> <p>   </p> <p> International reserve assets are projected to be at least $6 billion by January 1, 2022. The lowered projection is due to the unfavourable situation for Belarus in the international borrowing market due to the political crisis in the country, the need to service existing debts, as well as the unpredictable situation in the domestic market. </p> <p>   </p> <p> Economic agents see level of uncertainty rise sharply </p> <p>   </p> <p> In recent months, the Belarusian authorities have been increasingly returning to the use of administrative measures in the economy, which often have an unpredictable nature. For instance, on March 12, the National Bank cancelled the schedule of its monetary policy board meetings that had been set for 2021. The Board of the regulator reported that “the issues of changing the refinancing rate and rates on tools of banks’ liquidity regulation will be considered when necessary”. </p> <p>   </p> <p> In effect, the National Bank has abandoned its most important management tool in the form of interest rates, reducing them to a purely technical mechanism of keeping track of the amount of liabilities in the accounts. The level of uncertainty for economic agents has risen sharply. Comments by the National Bank on the decisions made have become more formal, and the dates of the meetings themselves can be set spontaneously for economic agents and the public. </p> <p>   </p> <p> The main reason for the current developments is the significant increase of political pressure on the National Bank. Its actions and moves are becoming less logical and predictable; the effectiveness of communications with private households and businesses is lost. In the end, it is highly probable that further movement in this direction may lead to a new man-made crisis in the Belarusian economy. End </p> <p>   </p> <p> PrimePress Business Analysis Agency </p>

2021-04-02

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